Cruise Ship Stocks Struggling to Stay Afloat

Cruise ship stocks posted strong November gains, with vaccine studies showing exceptionally strong outcomes, but industry players have been pulling back since early December, buffeted by surging infections and renewed lockdowns around the world. These headwinds just forced Carnival Corporation & Plc (CCL) to post a fresh round of cancellations, with most extending through March and a few through May, when many believed the industry would be back on its feet.

Key Takeaways

  • Cruise ship stocks have settled on their 200-day moving averages after a November rally.
  • Carnival was just forced to issue another round of cancellations extending into March and May.
  • Major operators may have to issue another round of secondary offerings to stay in business.

Cancellations are nearing the summer travel season while vaccine manufacturers are distributing vials as quickly as they can. The slow start practically ensures that widespread distribution will stretch through the third quarter, forcing millions of Americans to maintain social distancing practices beyond earlier expectations. In turn, cruise ship operators may have to go to the well once again, seeking loans or issuing secondary offerings to stay afloat.

Royal Caribbean Group (RCL) tried to avoid dilution when the crisis started but was eventually forced to relent, exhausting the last in a series of "at-the-market" equity offering programs when it sold 13 million shares in December. Undoubtedly, the company hopes to avoid new offerings, but distribution delays and the new virus strain could worsen the projected cash burn. As a result, investors should watch Royal Caribbean news because a new program will reveal skepticism about 2021.

Wall Street consensus on Royal is stronger than Carnival, with a "Moderate Buy" rating based upon three "Buy," six "Hold," and no "Sell" recommendations. A "Sell" recommendation marks the only difference in Carnival's lower "Hold" rating, with both calls reflecting modest caution. Royal is now trading about $4 above the median price target, while its rival is glued to that midpoint, predicting little upside for either issue until there's a light at the end of the tunnel.

The cash burn rate is typically used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations. It is a measure of negative cash flow.

Royal Caribbean Weekly Chart (2017–2021)

Chart showing the share price performance of Royal Caribbean Group (RCL) 

The 2020 price action is nearly identical on both stocks, but Royal's long-term chart looks like a better bet. A strong uptrend topped out at $128 at the end of 2017, giving way to a broad topping pattern that featured three failed breakout attempts into January 2020. The stock broke range 2018 support at $109 during the pandemic decline, dropped to an eight-year low in the upper teens, and bounced into the second quarter.

The recovery carved four rally waves, with the last impulse mounting the 200-day exponential moving average (EMA) when Pfizer Inc. (PFE) revealed positive Phase 3 data in November. That uptick posted a 10-month high at $85.10 in early December and rolled over in a decline that settled on the moving average ahead of the Christmas holiday. Buyers could return at this trading floor, but they need to hurry because the unfilled November gap is exerting pressure that could trigger a selloff into the $50s.

The on-balance volume (OBV) accumulation-distribution indicator hit an all-time high in September and entered a distribution phase that persisted through the November rally. OBV has now fallen to a four-month low, when the stock was trading 15 points lower than Thursday's opening print. Clearly, investors are hoping for good news that supports another rally wave, but it isn't wise to get complacent, with the pandemic once again filling up hospital beds around the world.

On-balance volume (OBV) looks at whether the current closing price is higher or lower than the prior close. If the close is higher, the period's volume is added. If the close is lower, then the period's volume is subtracted.

The Bottom Line

Cruise ship stocks have shifted into neutral status after a vaccine-induced uptick, vulnerable to gravity that could yield much lower prices.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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